Down but not out, US dollar suffers from debt debacle

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TOKYO: The US debt standoff has shaken confidence in Washington’s fiscal management and in the dollar as a reliable global currency, but, say analysts in Asia, there is no credible alternative to the greenback.

China and Japan, the biggest holders of US Treasuries, slammed the political gridlock on Capitol Hill and warned that a narrowly averted debt default would have destabilized the global economy—threatening their vast $2.4 trillion investment in US debt.

Lawmakers reached a temporary deal to raise the US government’s debt ceiling Wednesday.

But the standoff undermined “the credibility of the greenback as a reliable global reserve currency, which is already under a cloud thanks to repeated rounds of money printing,” said The Australian newspaper, referring to the US Federal Reserve’s $85 billion-a-month bond buying scheme.


And if Washington was unable or unwilling to bear its burden, others would fill the void, it warned.

“Chinese authorities are eager for their own currency to become a bigger part of global reserve assets,” the newspaper said.

“While Beijing openly implores US politicians to lift their debt ceiling, they would privately take solace in the relative stability of their yuan.”

China’s official Xinhua news agency called for “a de-Americanized world”, while the Global Times, a government mouthpiece, chastened the “unreliability of the US” and warned that the country’s position as a superpower was under threat.

China has “huge potential to engage in a competition with Uncle Sam since such a colossal amount of national debt means a certain degree of leverage”, the Global Times said in an editorial.

The dollar has seen few challengers since it supplanted the pound as the currency that greases the wheels of global commerce last century.

China has made moves to boost the status of the yuan in commercial transactions. But the unit is not freely convertible with most major currencies, hampering any challenge to the dollar, analysts say.

On Thursday, US President Barack Obama deplored the consequences of the fight, which led to a two-week government shutdown.

“Probably nothing has done more damage to America’s credibility in the world, our standing with other countries, than the spectacle that we’ve seen these past several weeks,” he said.

“It’s encouraged our enemies, it’s emboldened our competitors and depressed our friends who look to us for steady leadership.”

Weeks of intransigence ended hours before Thursday’s deadline with the passage of a bill extending the Treasury’s borrowing authority until February 7 while providing funding for the government to the middle of January.

The agreement to open the spigot on borrowing was crucial for Washington to have enough money to honor its commitments and pay the IOUs it signs when the Treasury sells debt to financial houses, firms and governments around the world.

A crisis of confidence over Washington’s ability to pay its debts could have seen investors abandon Treasuries, seizing up the global financial system.

The debt debacle was keenly felt in China—the world’s number two economy and the biggest single foreign holder of US debt—and set nerves on edge in Japan, the second-largest US creditor.

Japanese officials had warned of “consequences” for the global economy if the debt ceiling was not raised, while the Bank of Japan’s chief said there was a need to “dispel uncertainty about US fiscal policy”.

But the current deal, while welcomed, was met with a shrug of resignation and the knowledge that the world could easily be held hostage again just a few months down the road.

“The compromise is just a postponement of the settlement of the problem,” said Susumu Doihara, senior economist at NLI Research Institute in Tokyo.

And there is not much the world can do but cheer from the sidelines and hope the US will get its house in order, he said.

“I don’t think the status of US Treasuries as a safe asset will be overturned . . . because there is no alternative,” Doihara said.
“If Japan decides to sell the US Treasuries it holds, what could it buy next? Japan already holds a certain amount of euro-denominated assets . . . If China becomes a stable economic power in the future, Chinese bonds might start to become an option, but that’s not likely to happen soon.

“The reality is that we don’t really have a choice but to take it on the chin.”

AFP

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